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Commentary: How 2018 Will Either Make or Break OPEC


December 17, 2017 by Julian Lee

(Bloomberg Gadfly) 

And OPEC thought 2017 was tough. 2018 could be a killer.

The starting point isn’t great. The group and the International Energy Agency — the two giants of the oil world — have very different views of the year ahead.

OPEC sees the policy of output restraint finally yielding the results its architects intended, with the surplus in stockpiles eradicated. The consumers’ group holds the opposite view.

According to its forecasts, if output restraint continues, 2018 will see a further 155 million barrels of oil withdrawn from global stockpiles.

For the IEA, though, producers face a further accumulation of oil in storage in the first half of 2018 and a balanced market in the second half. Overall, it sees global oil inventories increasing by 72 million barrels.

They can’t both be right.

Consumers’ response to end-user prices, which are likely to rise, could be key. They had a clear reaction to the collapse in prices in 2015 — demand growth surged in response to a near 50 percent fall in prices that began in the middle of the previous year.

This year, growth in consumption has remained robust as oil prices stabilized around $50 a barrel. Will this continue next year? OPEC believes so. The IEA is not quite so confident.

The biggest difference, though, is on the supply side. The IEA sees much stronger growth than OPEC does in U.S. oil supplies. The Department of Energy is similarly upbeat. Its latest forecast shows U.S. oil production increasing by 1.6 million barrels a day between December 2016 and December 2018.

Importantly, its monthly assessments — which are usually more accurate — have now caught up with their weekly estimates. The ability, and desire, of shale producers to respond to higher oil prices could make or break OPEC and friends’ output pact next year.

For its part, OPEC has done an impressive job of sticking to its guns, and its friends outside the group have not done badly, either. Overall OPEC compliance with the cuts it agreed to make was 121 percent in November, according to the secondary source data the group uses to monitor the deal.

But, it’s important to remember that involuntary drops in production have been big factors in how well producers have done. That could actually be a big positive when it comes to unwinding the deal, if they get to that point next year. Around 400,000 barrels a day cut by Venezuela and Angola probably can’t be restored quickly, while the key Middle Eastern members — Saudi Arabia, the U.A.E. and Kuwait — will not want to raise output so fast that prices collapse again.

So will producers get to that point in 2018? Maybe. Inventories in the developed economies of the OECD countries, the only ones that are really visible, have begun to come down sharply in the past couple of months, after a slow start. But more than 60 percent of the reduction in the excess has come from an increase in the five-year average level of inventories, against which the excess is measured, rather than to the reduction of the amount in storage.

Sure, rising oil demand means that the world needs to store more oil to provide cover for the same number of days of demand. But even using this measure, the rising baseline still accounts for more than a third of the correction. Even if OPEC does get to where it wants to be next year, it may still find that the world has more oil in storage than it needs.

The group’s output restraint is already set to last four times as long as originally planned. Oil ministers will be fervently hoping that the IEA is wrong and that they won’t need to extend it again. Carrying everyone with them for a third year could start to get really tricky.



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